China’s 2015 tobacco tax adjustment: a step in the right direction

In August 2016, the Chinese public health community got a much-needed boost. The President of the People’s Republic of China, Xi Jinping, said at the National Meeting on Health attended by members of the Standing Committee of the Political Bureau of the Communist Party Central Committee, “An all-around moderately prosperous society cannot be achieved without the people's all-around health.” He stressed that “Prevention should be more important than treatment” and “If these issues are not addressed effectively, the people's health may be seriously undermined, and economic development and social stability will be compromised." 
 
Given China’s size and importance in the world, the emphasis placed by President Xi on health promotion and disease prevention is nothing but revolutionary.  Indeed, in an era where the organization and delivery of specialized, high-cost medical care dominates global health practice, the words of President Xi signals the emergence of a more balanced health paradigm in China, where public health and medical care reinforce and complement each other as part of a continuum of multi-sectoral actions to deal with both the causes and consequences of social, environmental, and behavioural drivers of ill health, premature mortality, and disability.  
 
China has the highest number of tobacco users in the world (>300 million) and smoking is a major killer.  Approximately 1 million deaths every year are caused by tobacco, despite improved access to medical care thanks to the expansion in recent years of national health insurance coverage.
 
In the face of this dire reality, what to do?  Wait to treat people when they develop lung cancer and other tobacco-related diseases, or adopt measures to prevent the onset of disease in the first place?  Governments have an obligation and the means to protect their population’s wellbeing by adopting effective fiscal and regulatory measures, in addition to providing medical care to those persons who fall ill.  In that sense, 2015 may prove to be a landmark year for tobacco control in China, as the Government adopted a national tax reform on cigarettes as well as a ban on smoking in public places in Beijing—a ban that is proposed to be expanded across the country. 
 

Initial assessments done by a team from WHO’s Collaborating Center for Tobacco and Economics at Beijing’s University of International Business and Economics (UIBE), show that the 2015 tobacco tax reform is proving to be a win-win for both fiscal and public health in China.  The evidence thus far:

• Impact on price and market structure. The weighted average wholesale price increased by 8.9% from 10.27RMB per pack in 2014 to 11.18RMB per pack in 2015. The average retail price increased by 10.29%, from 11.61RMB per pack to 12.81RMB per pack. However, from a global perspective, the weighted average cigarette price in China is still cheap: less than US$2 per pack on average.  As the low-end price categories increased more than middle and premium price categories of cigarettes, the price gaps between tiers have been reduced. This encourages smokers up-shifting from the low end categories (Class V and Class IV) to the middle and upper price categories (Class III and Class II). 
• Impact on tax incidence.  The sales weighted tax share as % of retail price increased from 52% in 2014 to 56% in 2015, which is still lower than WHO recommended standard of 75%.  The sales weighted average excise tax as % of retail price increased by 4% from 31% in 2014 to 35% in 2015.
• Impact on consumption.  For the first time since 2001, as confirmed by the State Tobacco Monopoly Administration (STMA), the volume of cigarette sales decreased by 2.36% in 2015 compared to 2014.  After the 2015 tax adjustment, sales continued to decrease by 4.61% over May 2015-April 2016 compared with May 2014-April 2015, and by 5.36% between October 2015-September 2016 compared with October 2014-September 2015.
• Impact on government’s revenue. According to STMA data, the tobacco industry in China contributed 840.4 billion RMB (about US$129.29 billion) tax revenue from tobacco products in 2015, an increase of 9% over the 2014 level.  As a state-owned enterprise, it also contributed an additional 190.97 billion RMB (US$29.38 billion) profit to the central government, plus 63.6 billion RMB (US$9.79 billion) enterprise income tax to the central government. The 2015 tax increase was applied at the wholesale level, which generated an additional 57.8billion RMB (US$8.89 billion) in excise tax at the wholesale level.
• Impact on public health.  A preliminary estimation suggests that within 12 months followed by the 2015 tax increase, the total number of smokers would decrease by about 5 million.

 While the impact of the 2015 tobacco tax increase is generating measurable benefits, the price of cigarettes in China continues to be low and increasingly affordable for a population that enjoys rapid wage increases.  If the ultimate goal is to help smokers quit and prevent the next generation from getting addicted to smoking cigarettes, then additional tobacco tax policy reforms are needed in China, especially for re-orienting the excise tax structure towards specific excise taxes at the retail level in the medium-term and towards a uniform tax system at the retail level in the long-term.  A recent study* estimated that a 50% increase in tobacco price through excise tax would lead over 10 years to 5.3 million years of life gained, and reduce expenditures on tobacco-related disease treatment by US$2.4 billion.
 
Looking into the future, as evidenced in a World Bank study “Toward a Healthy and Harmonious Life in China: Stemming the Rising Tide of Non-Communicable Diseases”, with stronger tobacco control measures including steeper tobacco tax increases, the rapid rise in China's non-communicable diseases can be halted, resulting in major gains for people’s health and the country’s social and economic development.
 
Related
 
The consequences of tobacco tax on household health and finances in rich and poor smokers in China: an extended cost-effectiveness analysis. Lancet Glob Health 2015; 3: e206–16
 
The consequences of tobacco tax on household health and finances in rich and poor smokers in China: an extended cost-effectiveness analysis. Lancet Glob Health 2015; published online March 13
 
Would raising tobacco tax in China unfairly burden the poor? Lancet Comment March 13, 2015

Economics of Tobacco Control in China.  From Policy Research to Practice